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Homeowners looking to refinance out of an ARM before it recasts will likely want a more stable option. At the same time, new borrowers may find piggyback loans less appealing as interest rates rise.
LPMI may be the solution that can offer these borrowers a stable, affordable monthly payment and a broader range of loan options through Fannie Mae's Desktop Underwriter (DU) and Freddie Mac's Loan Prospector (LP).
A fresh look at MI
LPMI can offer borrowers with good credit significant savings and tax benefits previously not available. In exchange for a slightly higher interest rate, LPMI reduces borrowers' monthly payments because the lender pays their mortgage-insurance premium. As such, borrowers no longer have to contend with that non-tax-deductible insurance premium.
Further, LPMI could be the unique selling proposition for which you have been searching. Brokers and lenders reap the benefits of LPMI by having to process only one loan, obtaining broader DU/LP approvals, increasing their customer base and augmenting their risk protection.
Plus, a larger first-mortgage amount means higher commissions and increased profitability. So what's to avoid?
Comparing the options
Old habits are hard to break, especially when it comes to selling piggyback loans -- but the proof is in the numbers.
Buyers with a 680 FICO score who are purchasing a $200,000 home with 10 percent down have a few options: traditional monthly MI, LPMI or a combo loan, whether an 80/10 HELOC or an 80/10 fixed-second.
As shown in the table above, borrowers can save $51 on their monthly payment by choosing a piggyback loan with a HELOC-second over traditional monthly MI. However, that savings is reduced by slightly more than $2 when those borrowers consider LPMI.
In the case of a piggyback with a fixed-second, the borrower saves $37 per month over traditional MI, but actually pays almost $12 more per month than on a loan with LPMI.
Any type of adjustable-rate second exposes borrowers to the risk of higher monthly payments in the future should prime continue to increase. As traditional MI can be canceled in as few as two years, borrowers need to consider whether it is worth saving $51 a month now with potentially higher payments in the future.
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